May 15, 2013

Apple Moving Away from Hon Hai may be a Good Thing

Hon Hai, the world's largest contract manufacturer of electronics suffered their biggest decline in sales in its history, according to a new Bloomberg report. To give this a larger perspective, a new report out of Beijing yesterday stated that "Foxconn's net loss in 2012 was US $316 million, the biggest loss it had suffered since listing in Hong Kong in 2005." So Hon Hai's downward trend has been ongoing since 2012. In April we posted a report titled "Windows 8 is a Disaster Leading the PC Sector to its Worst Quarter in Roughly 20 Years." Bloomberg echoed this in their report by stating that the "failure of Microsoft Corp.'s Windows 8 to drive PC growth pushed Hon Hai's revenue down the most in at least 13 years." So Hon Hai's downward trend isn't caused by an "Apple slowdown" alone, but rather a number of problems with the tech industry at large and the company itself.

Just last week Apple's supplier Pegatron was reportedly hiring 40,000 new employees to help handle with the production of new Apple products. A new report by China's Tencent provided a chart showing how Apple is splitting their orders between Hon Hai and Pegatron.

Apple had relied on Samsung for too many of their components for far too long a period resulting in a painful transitional period in resetting their supply chain in order to keep their iPhone and iPad products steaming ahead. One of the moves to secure a stronger supply chain going forward was a clear decision to split future iPhone and iPad orders to other suppliers. In doing so, some have interpreted Hon Hai's poor financials as being a direct cause of a slowdown in Apple's iPhone orders and that's not really the full picture.

Over the last several months there's been some tension between Apple and Hon Hai. In October we learned about production problems at the Foxconn factory that was supposedly due to the iPhone 5's high quality standards and the lack of training to get the job done. Additionally, there's been a lot of unrest at Hon Hai's Foxconn plant which forced Apple to push Hon Hai to except an expanded role by unions.

While tolerating employees and unions to a certain degree, Hon Hai made it clear that they're looking to replace their workforce with robots in the future. In the Beijing report published yesterday, Foxconn's spokesperson Liu Kun stated that "Nowadays, young workers are picky about their workplaces, and it's become difficult for us to find workers." This is the mentality over at Hon Hai and Foxconn and their disdain for human laborers is well documented.

In January we reported that Hon Hai had stated that "The iPhone 5 earphone workshop is using more than 100 robots, which has increased the work efficiency by 140%."

At that time, Hon Hai spokesperson Liu Kun stated that the robots have not been used in precision processes for the time being, and the company's plants in Zhengzhou, which is in charge of 70% of iPhone 5 shipments, will later adopt robots.

In a new report published in Beijing yesterday we learn that Foxconn has run into some difficulty in its automation efforts. A Foxconn equipment supplier stated that "Obviously, Terry Guo overestimated the pace of using Foxbots to replace workers." So far, some 20,000 Foxbots have been produced by Foxconn, a source close to the company said, but half of them are still in the warehouse.

The reason Foxconn researched and developed the robots on its own was to reduce costs. The company has said its core competitiveness for making the robots was that it had the material, parts and software. But research and development of robots requires huge capital and forced Foxconn to seek ways to control expenses.

The report also stated that some Foxconn department heads were opposed to using robots to replace workers because of the difficulties in redesigning production lines. They added that "some jobs require workers to use their judgment. The tasks may appear simple, but robots cannot be used to perform them because they lack decision-making ability."

The report provided some perspective as to why Hon Hai may have thought the Foxbots would be successful in the production of Apple products. "The automation rate of production lines that make ink cartridges for Hewlett-Packard Co. printers is the highest at Foxconn's Longhua factory. This production line was designed and manufactured by HP and has been used by Foxconn since April 2011.

Only five to 10 workers are needed on each line, about one-tenth of the previous number, Foxconn documents shows.

Hon Hai was obviously hoping that their success rate with robots manufacturing simple HP ink cartridges and Apple's EarPods would somehow magically translate into high volume production of a highly complex product such as Apple's iPhone. It was a crazy leap to make and it's back to the drawing board for Hon Hai.

In hindsight, there's a good chance that Hon Hai was pushing for Foxbot production of Apple's products at about the same time that they weren't training their employees to better handle the production of Apple's new iPhone 5. Hon Hai's distain for human workers is evident and the ongoing problems that they're experiencing in their plants extended to yet two more suicides recently. The company has spent hundreds of millions of dollars thus far (20,000 robots x $16,000 each = $320 million + research costs) instead of trying to improve factory conditions and deal with union issues so that current production rates could be maintained or improved.

At the end of the day, perhaps Apple pulling away from Hon Hai is actually a good thing.

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